The Ratings Game: Kroger edges ahead of Costco to land in the top 10 of U.S. e-commerce companies

Kroger’s digital sales are expected to reach $11.28 billion in sales in 2020, up 79% year-over-year. Costco is expected to come in at $11.18 billion.

Topping the list is Amazon.com Inc. AMZN, -0.14% with $309.58 billion, followed by Walmart Inc. WMT, -0.54% ($46.20 billion), eBay Inc. EBAY, -1.84% ($38.61 billion) and Apple Inc. AAPL, +1.23% ($27.51 billion).

Macy’s Inc. M, -0.43%, which had previously been in the top 10, has fallen off the list, which eMarketer attributes to the decline in apparel sales during the coronavirus pandemic.

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“Kroger will benefit from two tailwinds this year: Eating at home continues to be in favor among Americans, and there’s been greater interest by consumers in ordering groceries online,” said Cindy Liu, eMarketer’s senior forecasting analyst at Insider Intelligence, in the report.

Liu notes Kroger’s yearslong investment in digital, the 2,000 pickup locations the company has, and its 2,400 delivery locations.

“COVID-19 has upended the retail industry, shifting shopping priorities in a way that resulted in unforeseen changes in our rankings,” Liu said. “This is especially true near the bottom of our list, where less than a percentage point had separated Kroger and Macy’s in 2019.”

Target Corp. TGT, -1.21% has also broken into the top 10 this year, landing at number 7 with an expected $13.82 billion in 2020.

Also: Target stock rises after earnings beat expectations

Last week, Kroger reported third-quarter profit that beat expectations sales that fell short.

“I want to highlight that Kroger’s digital sales are profitable today, partly supported by our rapidly growing digital media business, and partly fueled by our constant improvement in operational efficiency,” said Kroger Chief Executive Rodney McMullen in prepared earnings comments.

This illustrates, not just strength in digital, according to McMullen, but also in “the overall Kroger ecosystem and how the component parts fit together to deliver value for our customers and our shareholders.”

 GlobalData agrees that Kroger’s digital investments “have paid dividends” this year.

“Kroger has coped well with a massive spike in online demand and has done so without too much damage to profit and margins,” wrote Neil Saunders, managing director at GlobalData. “Kroger has gained market share in grocery overall this year, but it has been especially good at picking up share online. Looking ahead, online will become the new battleground for the grocery sector.”

Saunders thinks Kroger gets points for freshness and produce selection that other mass retailers like Walmart and Target don’t. Kroger is also benefiting from increased holiday spending “and a resurgence of panic buying” as COVID-19 cases surge.

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Still, Kroger shares have fallen 12.7% over the past three months as the benchmark S&P 500 index SPX, -0.19% has gained 7.7% over the period.

For the year to date, Kroger stock has gained 6.8%.

“With COVID-19 cases rising, we think Kroger is likely to experience continued near-term outsized growth,” wrote UBS analysts. “That said, it will be facing a more challenging growth backdrop as the virus fades.”

UBS rates Kroger stock neutral with a $33 price target.

“Kroger will need to make a big announcement at its March investor event to keep investors engaged during a prolonged period of negative comparable-store sales and declining profitability,” wrote MKM Partners’ Bill Kirk in a note. Price investments are also taking a toll on gross margins.

MKM rates Kroger sock neutral with a $34 price target.

JPMorgan also says investors are concerned about what the future holds when the coronavirus, and all of the at-home dining that consumers are doing now, starts to become a thing of the past.

“If the Street thinks that Kroger’s numbers will be weak next year, then this likely will drive the share price; it’s almost impossible for KR or anyone to disprove this negative thesis at this time,” JPMorgan said.

“Indeed, for the KR shares to head higher, we think the company needs to convince investors that this year’s higher earnings will translate to higher earnings once COVID-19 has been contained.”

JPMorgan rates Kroger stock neutral with a $34 price target.